I walked into a South Florida real estate office yesterday and had the opportunity to talk briefly with the office manager. He seemed very upbeat as if business was going well, when I expected the exact opposite from him. After talking to him for a bit, he explained to me that all his business nowadays comes from short sales, REO’s, and foreclosures, and that every buyer that walks through his door is looking for a bargain. That begged me to ask the question, is the housing market starting to turn around? These bargain basement prices must surely be starting to attract buyers.

This week saw the release of data for both new and existing home sales for the month of February. New home sales staged their largest increase in over a year, increasing 4.7% MoM to an annual rate of 337,000. This was primarily due to both median single-family home prices and average single-family home prices being down by record amounts in February. Existing home sales nationwide jumped a seasonally adjusted 5.1% in February, the biggest one-month gain since late 2003. Buying activity was strongest in places such as Southern California and Las Vegas, which have a glut of foreclosures.

In California, existing home sales were up 83% MoM in February as home prices had fallen 40.8% to $247,590 from a year ago.

Even though these are monthly numbers, and home sales and prices are still down on a YoY basis, it is clear that the pace of decline in housing demand is abating. The average 30 year mortgage rate is hovering around 5% and is likely to head lower, making home purchases affordable to many Americans.

If you want even more statistics, though I believe this one is likely to be a statistical anomaly, the Federal Housing Finance Agency in this report, says that home prices, on a seasonally adjusted basis, rose 1.7% from December to January.

There are an increasing number of data points that are indicating that there are signs of life in this nation’s housing market, and I’m looking for a bottom in home prices in the second half of this year. Personally, I’m looking to acquire properties in South Florida because I think they will better withstand a potential devaluation of the US dollar.

Uncategorized california, florida, housing, sales

In Tuesday’s Wall Street Journal opinion section, Richard Lefrak and A. Gary Schilling present a compelling argument that by offering permanent resident status to those foreigners who purchase a home (not for rent) we can properly stabilize our housing market. At first, the idea seems a bit radical, but it does address the inherent flaw in our housing market whereas the current plan from the Obama administration does not.

The problem facing our housing market can be explained by the simple principles of supply and demand. The total supply of homes in this country is much greater than the demand at the current price levels. In the midst of the housing boom, many people speculated in the market or were given loans they could not afford, creating “artificial demand”. Now as the economy slows, and more people find themselves out of work, demand continues to wane as homes that used to be affordable currently are not for many American families.

In order to rectify the problem and bring us back to an equilibrium condition between supply and demand, we can do only three things:

• Reduce Supply
• Lower Home Prices
• Increase Demand

In the first case, we would demolish existing properties for which there is no demand. This leads to dramatic wealth loss as banks and developers would suffer massive losses and would not be in any condition to contribute to the economy, but the housing crisis would be solved. It’s unlikely we will head down this route.

In the second case, we just let nature take its course and let prices fall to their equilibrium level. Again, there will be dramatic wealth loss for the majority of Americans as their wealth is directly tied to the value of their home. The Obama administration seems determined not to let the housing price bubble deflate entirely, just like the stock market bubble did not deflate entirely by 2002.

The Obama admistration has already taken steps to stabilize demand through its $275 housing bailout plan, but the plan is designed to keep people in their homes and does not address the large overhang of inventory of unsold homes in cities like Miami, Phoenix, and Las Vegas. Without sharply reducing this inventory, home prices will continue to fall.

In order to increase demand and reduce existing inventory, the authors of the WSJ article propose that we “offer permanent residence status to the many foreigners who are clamoring to get into the U.S. — if they buy houses of minimal values (not shacks)”. Under the plan they wouldn’t need to live in the unit, but couldn’t rent it. At first, participants would be given temporary residence status that would convert to permanent residence status, after a period of say 5 years if they still owned the houses.

The plan is likely to attract highly educated, wealthy foreigners who are clamoring to get into this country. The article mentions: “Each year, 85,000 H-1B visas are granted for foreigners with advanced skills and education, and last year, 163,000 petitions were filed in the first five days after applications were accepted. The Ewing Marion Kauffman Foundation estimates that as of Sept. 30, 2006, 500,040 residents of the U.S. and 59,915 individuals living abroad were waiting for employment-based visas”. These are exactly the types of individuals we need as we try to restart the economy as they will contribute to existing businesses or start their own.

There is already precedent for allowing foreigners to achieve permanent resident status in return for investing in this country. The EB-5 visa program provides a path to permanent residency for those who invest $1 million in a new enterprise in the US. Other countries also offer similar programs for those who invest in businesses, tourism, or other sources. I don’t see why this same concept cant be extended to benefit those who invest in our country’s housing market.

Our country is a melting pot of immigrants and I believe this program could be effective if implemented on a limited scale in conjunction with the steps already taken by the Obama administration. Additional incentives should be given to foreigners who purchase property in hard-hit, less glamorous cities like Detroit and Cleveland. Immigrant populations have proven that they can regentrify communities and improve the overall quality of life for its residents.

I hope this plan receives serious consideration from the Obama administration.

Full text of the WSJ article can be found here.

Uncategorized housing, obama